Between the lines: Gattung delivers bad news with aplomb

If Theresa Gattung took on the toughest job in telecommunications when she became Telecom's chief executive, she was at her confident best yesterday, even as she presented one of the worst profit slumps in the company's history.

Her excuse, and nobody would dispute it, is that Telecom has embarked on a huge expansion in Australia at a time when global telecommunications conditions are extremely unpredictable. Indeed, no one today is sure what a telco should look like any more.

In a contest between a broad-based one-stop-shop model favoured by investors 18 months ago and a now-fashionable one in which mobile and broadband are run as discrete businesses, Telecom has decided to pursue both.

All the while, Telecom's money-soaking new investments must be managed. Ms Gattung could be justified in hoping they had taken place sooner in the manner of the Southern Cross project which will add $US100 million to Telecom's earnings this year.

With more than $1 billion at stake, Southern Cross was a huge risk when it was begun three years ago. But at least, at that time, there was a comfortable cushion of strong cashflows and profits.

The problem for Telecom is that it has no choice but to pursue growth opportunities because profit margins in traditional businesses are rapidly being competed away.

One remark by Ms Gattung is most telling. "I guess we had a strategic choice some time ago as to whether we were just going to close up shop in New Zealand, manage the business down, sit there and wait for someone to come along and acquire us," she said.

Was Telecom so focused on short-term profits and shareholder dividends that it ended up with so little going for it that it could consider throwing in the towel?

Such a sad outcome was never likely. But tackling Australia has demanded a huge amount of internal reorganisation to ensure the money was available. Costs had to be contained and the business re-engineered. And the lavish dividends punters had enjoyed are now being slashed in half to provide financial flexibility.

But even with AAPT barely digested, Telecom is looking to buy Optus' mobile business, a huge acquisition the impact of which may be even more profound.

Certainly, Ms Gattung is promising that Telecom will give Australia, and New Zealand for that matter, everything it has got. And the signs are encouraging with AAPT already delivering about a third of group revenue. But with growth AAPT's prime objective, its expenses are high, and it will be a while before it returns meaningful profits.

Investors will not wait.

And in the absence of a cast-iron guarantee that the Australian strategy will work, Ms Gattung's bullishness is cutting little ice.